President Obama Faces First Major Public Backlash Over AIG Bonuses

A political tsunami was unleashed against Barack Obama and the Democrats this past weekend when it was revealed that AIG had paid out approximately $165 million dollars in bonuses to employees of AIG's Financial Products unit, despite the company receiving nearly $200 billion dollars in government aid.

The fallout has been swift, and the public is furious with the recent turn of events.

The Republican party, stunned after suffering major setbacks in the 2008 elections, finally has an issue that they can really dig their teeth into and attack the Democrats on. They have been particularly outspoken in their criticism of Treasury Secretary Timothy Geithner, with some calling for his resignation.

The bonus situation has dealt a blow to Barack Obama, and has cost him some of his political capital moving forward. There will undoubtedly be future bailouts needed in the near future, and Obama will have a much harder time pushing these through, due to the outrage over the AIG bonus payments.

Political figures such as Senator Christopher Dodd (Democrat) and Timothy Geithner (Treasury Secretary) are getting pummeled in the press and in the court of public opinion. Barack Obama has seen his approval numbers dip as a result of this scandal as well.

There is now a scramble underway to undo some of the damage that has already been inflicted.

Proposals are being circulated that would have the bonus money clawed back through massive 90% taxes on those who received the bonuses.

Edward Liddy, who is the current CEO of AIG, maintained that the payout of the bonuses was "necessary" because the departure of key employees would result in "catastrophic losses" for the company.

He maintained that key departures from the Financial Products unit (which is the unit that got AIG into so much trouble in the first place) would run the risk of blowing up the company just when it needs these employees the most.

However, reports tonight are indicating that the bonuses were paid out AFTER the Financial Products unit had managed to wind down some of the most "explosive" derivatives in their portfolio.

This has led many to ask why AIG paid out the $165 million dollars in bonuses when these "key" employees didn't really need to be retained at all. After all, Liddy maintained that the bonuses were necessary to retain these employees so that they could finish their very important work, while the reports tonight are indicating that they had pretty much stabilized the derivatives portfolio prior to the bonuses being issued.

People are also wondering:

1. Why the government couldn't have insisted on these contracts being altered or broken in return for AIG receiving bail-out money

2. What is the deal with Senator Dodd's contention that the Treasury department insisted that he insert exemptions into the stimulus package that would allow bailed-out companies to still pay out bonuses

3. How far Obama will go in protecting Geithner from the slings and arrows of the Republican party and the media

4. When Geithner first became aware of the bonus situation

5. How much damage this will do to the Obama administration going forward

This is an incredible mess for the Obama Administration, and it will be interesting to see how this all plays out.

Filed under: General Market News